Bank and Cash Consolidation: Everything You Need to Know

Cash management is a vital task for any company, but it becomes more complex as the organisation grows and cash flows diversify. In this article we take an in-depth look at all the key factors of good cash management for a group. Discover the legal obligations, our tips, the vital tools and everything you need to know on this topic!

1. Cash management in a large group: meeting requirements and coping with the complexities

1.1. Legal, regulatory and fiscal requirements

Requirements under banking regulations: intra-group credit transactions

What does the law say about cash transfers? In France, the Banking Act (Act 84-46 of 24 January 1984) expressly prohibits any person, other than a credit institution, from carrying out banking transactions for any undertaking. However, Article 12-3° allows certain exceptions, including cash transactions between companies in the same group. So, you can rest assured!

Therefore, for example, the parent company can carry out transactions such as loans and current account advances to centralise the cash surpluses of certain subsidiaries with the aim of redistributing them to those whose cash flow is negative. But the law does not stop there...

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The implications of company law

To be sure that intra-group cash transactions comply with legal rules, the articles of association of the companies concerned must provide for the possibility of granting advances and loans. This means establishing that the loan granted is directly related to the business of the lending company. In more practical terms, company law introduces some specific requirements for cash management within groups in areas such as cash pooling agreements (an agreement whereby the members of a group pool their cash flows in a "hub" company), the risk of fraudulent use of corporate property or the risk of extension of receivership or court-ordered liquidation.

Fiscal requirements

There are two main things to remember concerning fiscal requirements. First of all, avoid applying interest that is too high compared to the general rules on interest deductibility. Conversely, if the interest is too low, it will be regarded as an abnormal act of management and could lead to the reintegration of the interest not charged. In the end, it's all about striking the right balance.

Requirements in foreign countries

Lastly, a large group may have entities in several countries! If this is the case, bear in mind that specific requirements apply to subsidiaries operating abroad. Pay particular attention to the following aspects:

banking regulations: enquire about local legislation and whether it makes provision for a banking monopoly on lending, foreign exchange and sales of financial instruments. It may also be a good idea to find out about types of mandatory reserves and their calculation, as well as risk-splitting ratios and the like.

● foreign exchange control: check that it exists and what the requirements are.

● reporting obligations : check their content and especially the thresholds defined.

● company law: pay attention to specific provisions.

● tax regulations: check withholding taxes on interest paid.

1.2. Lack of visibility of group entity performances

With the multiplication of subsidiaries, managing a large group can quickly become complex, and not only from a legal, regulatory and tax perspective. If your cash management is only done at the level of each entity, you might not have visibility on the performance of the group as a whole. Yet, to properly manage your multi-entity business, you must be able to check and measure achievement of your goals at different levels: at the level of each entity, at group level, or even for each different geographical area. This multi-level view is a real key to making the right decisions and successfully steering and growing your business.

2. Managing cash in a large group: the solution is consolidation

But what do we mean by "consolidation"? The cash consolidation of a group consists in monitoring the activity and cash flows at several levels with the right information to meet the group’s needs and manage it more efficiently (at the level of each entity, a geographical area, by type of inflow or outflow, or across the entire group, etc.). So, let's take a look at the main questions concerning consolidation.

2.1. Consolidation and Risk Prevention

Managing a group involves a lot of constraints and complex issues, but they can be overcome, particularly in terms of management, by setting up a consolidated steering system. This system will help you prevent the risks your company is exposed to (foreign exchange, lack of liquidity, insolvency, etc.) and thus ensure that each subsidiary has adequate cash. It is therefore very important to be able to switch between the different levels of your cash flow monitoring.

In practical terms, despite the difficulties that can arise when managing the cash of several subsidiaries, a consolidated vision of a group’s cash position allows you to:

● optimize your efforts, and your credit and investment management, in order to better direct available cash to entities awaiting major payments or facing cash flow shortages.

● standardise the banking conditions you lay down

● make the right decisions for the development of the whole group, for example by identifying the best performing entities and those that require more targeted cash flow monitoring.

2.2. Should you pool 100% of cash?

Consolidation does not directly lead to cash pooling and you can keep each subsidiary independent while maintaining your comprehensive vision of the group. So what about pooling the cash flow of companies in the same group?

On the face of it, cash pooling) may seem illogical. First, it leads to centralising negotiations and decisions whereas, on the other hand, efforts to train people and decentralise responsibilities at several levels are essential for successful management. Second, it might seem surprising to deprive profit centres of the flexibility offered by having abundant reserves of cash and to introduce too many formalities that could impact the motivation of subsidiary directors.

Despite these drawbacks, centralisation has several advantages and can be done at several levels.

Here are four possible levels:

● Centralising management of the foreign exchange risk of transactions and liquid assets, but only above a certain threshold. In this case, cash flows and payments continue to be managed at subsidiary level.

● Centralising management of risks and flows (with decision-making freedom for subsidiaries depending on their size). In this case, cash pooling is used (a banking management technique that centralises the management of the financial flows of several subsidiaries in the same group, with the aim of easily balancing the various accounts).

● Centralising risks, the management of working capital requirements, cash flows and payments with variants involving different degrees of centralisation. This centralisation can be done in two ways: either with less delegation through a payment centre, or with more delegation through a shared service centre.

● Fully outsourced management (to specialised firms)

Looking at different solutions is a step in the right direction, but to make your decision you need to understand the implications of each option. This is the focus of the next section.

2.3. Central or Local Cash Management? The Pros and Cons

Managing a multi-entity company comes with important choices regarding the organisation of cash management.

The main advantages of centralised cash management are:

● Optimisation of interest rates for investments or intra-group loans.

● Optimal use of internal resources.

● Reduction in needs for third-party funding (including the related costs and expenses).

● Overall improvement in the economic performance of the group.

● Full view and good control of the various subsidiaries’ liquid assets.

However, management at a local level avoids the drawback of centralised management and has some real advantages:

● Greater financial independence for the group’s entities

● Reduced concentration risk

● The subsidiaries have a higher risk of insolvency, so more preventive action will need to be taken

● Less legal uncertainty and fewer tax pitfalls, because management is done locally, thereby avoiding unnecessary widespread practices

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3. How to consolidate cash in a large group: the key steps

To switch from independent to centralised management of your group's cash, we recommend following five key steps:

• Start by mapping the group. This map will allow you to visualise your different entities, their locations and their financial interactions. It is an essential step to find a solution that best matches your situation and truly meets your needs.
• Then, analyse how cash management works locally and identify possible pooling structures based on the specificities of the entities (country in common, extent of cash flow exchanges, the architecture of your bank accounts, the types of banks in question).
• After these first two steps, you can then move on to assessing banking relationships to choose the right banks and negotiate your terms. In this step, pay particular attention to the cash flow situation of the subsidiaries and the legal, technical and operational constraints in the country they are based in. This is where your group cash pooling agreement comes in!
• Once you have equipped your entities with suitable bank accounts, you now need to manage your chosen centralisation technique. You therefore need to define your expectations: do you want to pool cash, or centralise different interest levels, or the various payments you receive?
• As the final step, find a tool that will allow you to manage the cash flows generated by the whole group. A cash management software programme with a consolidation function can be a great help!

In practice, with cash management software you will:

● save a lot of time, as you avoid painstaking data input by hand

● have automatic financial data feeds, thus avoiding potential errors.

● have a complete view of your group’s cash position, in real time and in just a click thanks to an automatic connection to your bank accounts. It is essential to be able to monitor the performance of your entities, look to the future with confidence and make the right decisions at the right time.

● seamlessly browse between several consolidated views that you can tailor to your specific needs (full consolidation, by type of activity, by geographical area, etc.)

● use forecasts generated by the software to share your exports within the group or with your partner banks and investors.

Get a consolidated view of your cash flow with Agicap!

With Agicap you can easily switch from one view to another to monitor and forecast your cash flow. You can also monitor the cash pooling strategy introduced.

In the case of franchises, Agicap allows you to compare performances between franchises and your operating companies.

With Agicap, you can:

● monitor the performance of each entity to make your operational decisions and prepare your overall strategy,

● manage your group forecasts,

● compare performances of different entities through inflows and outflows.

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